On 05 August 2021 the OECD’s Inclusive Framework issued an update on progress made in combatting harmful tax practices. The updated included the results of reviews of preferential tax regimes that have now been approved by the Inclusive Framework.
The OECD’s Forum on Harmful Tax Practices (FHTP) looks at potentially harmful tax regimes as part of the implementation of the minimum standard under Action 5 of the OECD/G20 action plan on base erosion and profit shifting (BEPS).
The Action 5 review of harmful tax practices is mainly concerned with preferential tax regimes that aim to attract mobile business income including income from intellectual property and from financial or other services. Preferential tax regimes are often introduced to stimulate economic growth or to attract foreign direct investment and these measures are not necessarily considered to be harmful.
A tax regime may however be considered to contain harmful features if it can be used to achieve base erosion and profit shifting. The reviews under BEPS Action 5 look at the design of each incentive to assess the extent to which it may contain such harmful features. Where a preferential regime is considered to have harmful features it would need to be either amended in line with the minimum standard, or abolished within an agreed time period.
The latest outcomes show that the Australian offshore banking regime has now been abolished, with grandfathering provided to existing taxpayers within the agreed timelines. Also the Philippines is committed to abolishing its regional operating headquarters regime with effect from 1 January 2022.
The United States has confirmed that it intends to abolish the foreign derived intangible income (FDII) regime, and for the purpose of the update the Inclusive Framework has classified the FDII as “in the process of being eliminated”.
Commitments have been made by the governments of the Dominican Republic, Gabon, Sint Maarten and Jordan and the relevant tax regimes are labelled in the updated as “in the process of being amended/eliminated”. However, Trinidad and Tobago did not complete the abolition of its special economic zone regime within the agreed timelines and the regime is now considered to be “harmful”.
Two newly introduced regimes were concluded as “not harmful”. Hong Kong SAR has introduced a profits tax concession for specified insurers and licensed insurance broker companies, which is considered to be in line with the FHTP requirements. Also the new international company regime in Georgia has been designed in line with the required standards and is not considered to be harmful.
The FHTP has begun a first review of 12 regimes in Armenia, Eswatini, Honduras, Lithuania and Pakistan and these tax regimes are noted as “under review” in the latest update.
